Over the past two months, I have been asking whether the poor get a better deal from microfinance compared to the alternatives. Lynne Davidson Jarrell has provided us her perspective on the main points of the ten or so posts.
What does this mean for Freedom from Hunger?
Now I must make this discussion valuable to my employer, Freedom from Hunger, by focusing on what all this tells us about the benefits of our own work. For 25 years, we have designed, tested and taught independent partner organizations worldwide (mostly in West Africa, the Andes, Mexico, India and the Philippines) a couple of forms of microfinance that deliver credit and savings services to and through groups of 10–30 women living in very poor, rural areas.
Some of these groups are trained and offered credit and savings opportunities by microfinance institutions of various types (MFIs, rural banks, NGOs and credit unions)—what we most often call Credit with Education. Others are trained by NGOs to become independent savings groups that provide credit from their own savings only—Saving for Change (developed jointly with Oxfam America and the Strømme Foundation of Norway).
Our general question is how much benefit (net of cost) these women get from their participation in these groups compared to the alternatives available locally. In Theme Two, I started with a very basic question: Does participation in these groups lower their cost of access to credit and saving services? This is not a question about impacts on client welfare, other than the reduction of costs so that clients can devote more time and/or money to other needs and wants.
What we’re learning
This exploration began by observing that the poor often seek loans from friends and family and ask neighbors to guard their savings, usually at no charge. Compared to microfinance institutions, friends and family are unreliable, limited in the amounts they can handle, and impose “implicit costs” (think about asking relatives for money!).
While traditional “moneylenders” have many of the reliability and privacy advantages of microfinance providers, they impose high costs to cover the high risks of their lending to those who can’t or won’t get loans from formal financial institutions. However, the price advantage of microfinance providers is not as much as it may seem, because moneylenders may be more flexible in dealing with late repayment and even default, thereby reducing the effective interest rate for those struggling to repay. Moreover, moneylenders require very little paperwork or lead time to get small, short-term loans (as short as one week or one month). The greater reliability of microfinance providers seems to be achieved at the expense of flexibility.
In fact, it is tempting to conclude that microfinanciers just add another option to several options already available, filling financial needs with loan and saving terms somewhere between moneylenders/moneyguards and commercial banks. Having more options is a benefit, but microfinance may provide no net benefit greater than the others, just serving different needs.
However, microfinance providers, like Freedom from Hunger’s partners, who are serious about their social goals, are more likely to recruit, train, supervise and incentivize their frontline staff to offer a significantly better deal to the poor than other providers of financial services. Socially motivated practitioners literally go the extra mile to reach the very poor who otherwise have no access to banks or even moneylenders. They often turn costs, like having to participate in a group, into benefits—by adding value to group meetings so that they become mutual assistance associations and distribution points for education and other non-financial services.
I cautiously conclude that the women who participate in the groups supported by Freedom from Hunger partners do indeed, on average, get a better deal (lower net cost of borrowing and/or saving) than they would get from the locally available alternatives:
1. Because our partners often serve women who have no access to other financial service besides that provided by unreliable family and friends.
2. Because our partners usually offer credit and saving services at lower monetary cost than local moneylenders/moneyguards—especially true in the case of savings groups that lend from their own savings and return the interest revenue to the common pot of savings.
3. Because our partners train and support their staff to be non-formal adult educators and use this skill to offer start-up training and ongoing facilitation of group dynamics that foster members’ mutual assistance and enjoyment. This effect is hypothesized to be independent of any education content other than the group formation and self-management. The effect is expected to be stronger in the case of groups supported by microfinance institutions that provide regular, multi-year support by their frontline staff.
The evidence for these conclusions is strong, but not in the sense of demonstration through experiments in the field that have yielded statistically unassailable results. Not in the sense that I have provided hard numbers showing the actual difference between costs of alternative offers made to the same people in the same area. The strength of the evidence is found in the logical inferences that can be drawn from reasonable comparison of models we know well and from the inferences drawn from the reports of others.
I also conclude that on this particular dimension, net cost, savings groups independent of external credit offer a better deal, on balance, than the groups supported by microfinance providers offering loans from external capital. Assuming both types of group are trained and initially supported by similarly trained and supported frontline staff, the independent savings groups are hypothesized to have lower net costs of borrowing and saving, despite the dependent credit groups receiving longer term support by frontline staff of microfinance institutions.
Note that these cautious conclusions are not about impacts due to investment of loans or use of savings or due to education in health or business topics or other services provided through the groups. They are simply about the net costs of group membership and of borrowing and saving. Note too that I am not concluding that savings groups are more cost-effective or sustainable as a business model for allocation of donor dollars for the benefit of the poor—the “business case” questions will be dealt with later in Themes Seven and Eight.
I also want to point out that a few of our partners (in the Andes) support groups that benefit from both internal credit from their own savings (the “internal account” of village banking) and external credit from microfinance providers. These hybrid groups may impose the lowest net costs of all, since they serve the different financial needs addressed by savings groups and credit groups but in one delivery package–worthy of further investigation.
In sum, the evidence is strong but not so strong that we can say the question is settled. Further research would clarify a number of issues raised in my posts.
In addition to the hypotheses (usually stated as conclusions) proposed above, I have put on the table a hypothesis that socially motivated microfinanciers are more likely to offer a better deal than others focused just on microfinance as a business. More specifically regarding program placement: the poorer and less profitable the potential clients, the more likely they will be offered their first access to microfinance by a provider motivated to give priority to a social objective over profit maximization.
I have also suggested that healthy group dynamics and a trusted field agent are key ingredients of satisfaction with group membership. The more socially motivated providers are more likely to train and support their field agents to facilitate healthy group dynamics. Such training and support is the hallmark of Freedom from Hunger’s successful partner providers.